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Can Netflix Conquer Europe?

The company has launched in six new countries.

Netflix (NASDAQ:NFLX) intensified its assault on Europe this month by launching in six countries, including France and Germany, its biggest ever expansion push.

The launch also included Austria, Switzerland, Belgium, and Luxembourg, which marks a change to how Netflix has approached expansion. In the past, the video service has added new territories at a more measured pace, minimizing how many languages it has to deal with each time. The company added Canada in 2010, Latin America in 2011, the United Kingdom, Ireland, and Scandinavia in 2012, and the Netherlands in 2013.

Jumping into six new territories at once, which speak multiple languages, is a new type of challenge. Austria and Germany speak German, France speaks French, while Swittzerland counts German, French, Italian, and Romansh as official languages. Belgians speak Dutch, French, and German, and the majority of Luxembourg's residents speak Luxembourgish, though French and German are the official languages. That, plus dealing with a variety of cultures, and some resistance to American-owned companies, makes the expansion a potentially profitable, but risky gambit.

This has not stopped Netflix CEO Reed Hastings from being very excited about the company's ability to woo a significant portion of the 63 million broadband homes the company says are in the six countries combined.

"We've received a very warm welcome throughout Europe," said Hastings in a Sept. 19 press release. "Consumers love choice -- in series and films and in when and where they watch. We are delighted people are embracing Netflix in our newest territories and, particularly, the incredible viewer enthusiasm for our original series."

Hastings is also realistic and knows how big the challenge is telling Reuters that Netflix will focus on getting it right in these six countries before rolling out to any more.

Technical and financial hurdlesA huge positive for Netflix is that American movies and television are popular around the world and the company has rights to an enormous amount of those. What it does not have is localized content.

As Toby Syfret of Enders Analysis pointed out to Reuters, when Netflix enters a new market it needs to cover significant costs for content and other investments before it begins making a profit.

That means creating new shows, something it is already doing in France, and licensing market-specific content -- all of which adds to the cost.

Netflix also needs to make deals, Hastings told the news service, to get on set-top boxes. To do that the company has to make deals with Internet service providers and cable companies, a set of businesses the company has struggled to deal with in the U.S.

These are all solvable problems in theory, but they are costly hurdles.

France is a special problemFrance is extremely protective of its culture and language, and there has been a bit of a backlash to Netflix's arrival.

When a group of company executives visited Paris earlier this year, they were welcomed by an open letter from a group of French film producers warning of an "implosion of our cultural model," The Wall Street Journalreported.

The company has responded by being very friendly, pointing out that it has a lot of French language content, though it won't specify how much, and announcing the production of Marseille, an original show set in the country.

Along with the charm offensive, Netflix has been tactical, as it's European headquarters is in Amsterdam, which allows it to skirt French laws which require 40% of programming on television and radio to be of French origin.

A screenshot of the Netflix France user interface. Source: Netflix

Big lossesInternational streaming has so far been a money loser for Netflix and the company forecasts that loss will increase due to this expansion.

International Streaming

Q2 '13

Q3 '13

Q4 '13

Q1 '14

Q2 '14

Q3 '14 Forecast

Revenue (in millions)

$166

$183

$221

$267

$307

$347

Contribution profit (loss)

($66)

($74)

($57)

($35)

($15)

($42)

As you can see in the chart above, the company had almost reached breakeven on its international efforts before forecasting a greater loss due to adding the six countries. Netflix has been profitable overall and it can afford to fund this expansion out of its operating profits.

Will it work?While Netflix has proven its model in the United States it has yet to do so globally, but the fact that international streaming nearly broke even in the second quarter of 2014 suggests that it's possible. Entering six countries with disparate cultures and languages at the same time is a risk and it does raise the question of why Netflix would not pick off low-hanging fruit in the English-speaking world first. The company, for example, has yet to launch in Australia, an English-speaking country with American sensibilities that is used to paying for TV.

Ultimately, while each country will be its own battle, Netflix has such an impressive array of content that it should be able to overcome cultural resistance, distribution challenges, and local knockoff services. It won't be a quick path to profitability, but Netflix has shown that it can manage costs while getting bigger. By keeping losses tight, the company will eventually conquer these six countries, paving the way for further expansion.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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